1981 (9) TMI 202 - AT - Income Tax

Transfer of Partnership Assets to Partners not Taxable: Tribunal Rules Firm Cannot Own Property Separately

Income Tax Officer. Versus S. Rajamani And Thangarajan Industries.

Income Tax Officer. Versus S. Rajamani And Thangarajan Industries. - ITD 001, 504, Issues Involved:1. Whether there was a transfer of property and assets from the partnership firm to the partners, attracting charges under section 41(2) and capital gains under section 45 of the Income-tax Act, 1961.2. Whether such a transfer, if it occurred, was valid without a registered instrument in writing, given the involvement of immovable properties.Issue-wise Detailed Analysis:1. Transfer of Property and Assets:The primary issue was whether the taking over of the firm's assets by the two partners constituted a 'transfer' under section 2(47) of the Income-tax Act, 1961, thus attracting charges under section 41(2) and capital gains under section 45. The Income Tax Officer (ITO) considered the transaction as a sale or transfer, bringing to charge profit under section 41(2) and capital gains. However, the Commissioner (Appeals) disagreed, stating that such a transfer would require a registered instrument under the Indian Registration Act, which was not present in this case.The Tribunal examined the clauses in the partnership deeds and found that the properties and assets were intended to belong only to the two partners, Shri Rajamani and Shri Thangarajan, and not the partnership firm. This intention was evident from provisions allowing only these two partners to manage, sell, or mortgage the assets and stipulating that upon dissolution, the assets would revert to them at book value.Additionally, the Tribunal referred to section 14 of the Partnership Act, which allows partners to agree that certain properties will not be treated as firm property. The Tribunal concluded that the assets belonged only to the two partners and not the firm, and their withdrawal did not constitute a transfer.2. Validity of Transfer Without Registered Instrument:Even assuming the assets were firm property, the Tribunal considered whether a valid transfer could occur without a registered instrument. The department argued that no registered document was necessary, relying on the Madras High Court decision in CIT v. Bharani Pictures. However, the Tribunal found that the Supreme Court's decision in Malabar Fisheries Co. v. CIT, which postdates the Bharani Pictures case, provided a different legal position. The Supreme Court held that a partnership firm is not a distinct legal entity from its partners and cannot own property separately. Therefore, any distribution of assets among partners is merely a mutual adjustment of rights, not a transfer.The Tribunal also noted that the Allahabad High Court in Ram Narain & Brothers v. CIT supported the view that a transfer involving immovable property requires a registered instrument. The Madras High Court had concurred with this view in Bharani Pictures.Conclusion:The Tribunal concluded that there was no transfer of assets from the firm to the partners that would attract charges under section 41(2) or capital gains under section 45. The Tribunal upheld the Commissioner (Appeals)'s order, stating that the charge under section 41(2) and capital gains was not justified and the appeal was dismissed.